Is American Health Care Inefficient?

Written By: Jason Shafrin
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Sep•
24•08

Economists generally define efficiency in two manners: productive efficiency and allocative efficiency. Productive efficiency means producing a good or service using fewest inputs. A car company who produces a car that costs $20,000 to manufacture is less efficient than a company that can produce that same car (at the same quality) at a cost of $15,000. Allocative efficiency is more subtle. Are we producing the right amount of cars compared to trucks? As gas prices rose, allocative efficiency compelled many car makers to shift to smaller passanger cars and hybrids compared to trucks.

Alan Garber and Jonathan Skinner (2008) apply the dual concepts of productive and allocative efficiency. They ask: is the American health care system efficient? The authors find that the American health care system is inefficient in both a productive and allocative sense. The health care provided in other countries, however, is also inefficient, often for different reasons.

Productive Efficiency

Not providing low cost, high quality care or prescribing unnecessary treatment both decrease efficiency. “There are sins of omission–one recent U.S. study suggested just half of recommended care is provided in a typical primary car visit (McGlynn et al. 2003)– as well as sins of commission–the spinal fusion surgery that provides marginal relief and more complications compared to conservative management (Rivero-Arias et al. 2005).”

Table 1 from the Garber and Skinner paper compares some key healthcare statistics between the U.S., Canada, France, Germany, the Netherlands, U.K., and Japan. Any evaluation of a health care system must take into account the health of individuals before they are treated by medical providers. Americans have the highest levels of obesity and diabetes and lowest levels of smoking in the world. Further, rates of motor vehicles accidents and homicide are high compared to those in the rest of the developing world. After taking these baseline population characteristics into account, is the production of American medical care efficient?

Table 1 also show that the U.S. has low levels of EMR usage and high administrative cost. Elderly influenza vaccination, however, is fairly high compared to other developed nations.

An interesting survey by the McKinsey Global Institute looks at the cost and outcomes for 3 procedures (gallstone disease, breast cancer and lung cancer) in Germany, the U.K. and the U.S.

“In each case the United Kingdom was more parsimonious in its use of resources for the management of each condition. However, Germany, not the U.S., use the most resources in the three conditions in which it was included.

In the treatment of lung cancer, patients in the U.S. experienced better outcomes than those in Germany and far better than for patients in the United Kingdom. For breast cancer, outcomes were slightly better in the U.S. while for gallstone removal, the United Kingdom had worse outcomes than the U.S. or Germany. Germany in turn had slightly better outcomes than the U.S. but much greater resource use.”

Allocative Efficiency

Allocative Efficiency determines whether health care spending is at the correct level. Should we increase health care spending or instead spend those resources on education, roads or R&D?

Table 1 shows some statistics to quantify the allocative efficiency of the U.S. Physicians per capita in the U.S. is in line with that of other nations, but this does not reveal the U.S. preference towards utilizing more specialist physicians than generalists. Hospital beds per person is fairly low in the U.S., but this statistic hides the fact that the U.S. uses more outpatient facilities and that hospital care in the U.S. is more resource intensive than is the case in other countries. Surgery wait times in the U.S. are fairly low, but many 20% of Americans receive unnecessary medical care. Further, the American reduction of preventable deaths was the lowest of any country in Table 1.

While the U.S. does have a famously high MRI rate of 26.5/million, Japan loves the MRI machine the most. The Japanese MRI rate is 40.1/million. “The cost structure of …[high-tech] treatment seems ideally suited to rapid diffusion in the U.S.: high fixed cost of installation, low marginal cost of operation, and reimbursement rates based on average rather than marginal cost.”

Conclusion

The Garber and Skinner paper provides a nice overview of the American health care system compared to those of other countries. While the paper works mostly in generalization and country-level statistics, it does provide a nice framework for thinking about health care reform. The American health care system is certainly inefficient, but so are the health care systems in other countries. How inefficiency manifests itself depends on the health care system adopted by the country. In the U.S., inefficiency is mostly due to the fact that “the U.S. typically does not consider effectiveness relative to its costs or to the costs of alternative treatments.” Further, because of the fee-for-service compensation system, American patients have high quality care available to them, but at a high cost. Further, fee-for-service compensation induces providers to recommended unnecessary or less cost-effective care to patients.